Jumbo mortgages finding favor with bankers

Published: Saturday, September 14, 2013 at 10:30 a.m.

Last Modified: Saturday, September 14, 2013 at 3:20 a.m.

Jumbo mortgages – a relatively obscure financial product to most potential homebuyers – have moved into the spotlight of late.

For one thing, people in the market for $1 million homes have jumped into the market in greater numbers, and one of the reasons is that money for them is cheap.

The trade publication Inside Mortgage Finance reports that though mortgage originations have been falling, jumbo mortgage originations rose 9.3 percent in the second quarter from the first quarter of 2013.

Interest rates on the mortgages – those totaling at least $417,000 in most areas of the U.S. and $625,000 in the most expensive markets – earlier this month uncharacteristically moved lower than those for the vast majority of Americans, who take out what are called conforming loans.

The situation was pretty much the same last week as jumbo mortgages averaged 4.84 percent, versus 4.80 percent for conforming loans, according to the Mortgage Bankers Association. Jumbo loan rates historically have averaged at least 0.25 to 0.50 percent higher than conforming loans.

Cheap money

Why did it become as cheap for the affluent to borrow hundreds of thousands or even millions of dollars as for most prospective homeowners who are seeking a mere $100,000 or $200,000?

It would seem it should be more expensive because, unlike conforming loans, Fannie Mae does not buy jumbo mortgages from lenders and therefore they are not guaranteed by the federal government.

But bond investors have been willing to forgo a government guarantee on the mortgages in return for the safety of money lent to more creditworthy, high-net-worth borrowers. That has driven the prices of the bonds backed by jumbo loans higher and their interest rates lower, said Ed Graham, professor of finance and real estate at the Cameron School of Business at the University of North Carolina Wilmington.

The drop comes amid the sharp increase in interest rates on conforming loans in the wake of the Federal Reserve's indication that it might begin to taper off on its purchase of bonds. That policy, so-called quantitative easing, until recently held mortgage interest rates at historic lows.

Portfolio loans

Another reason for relatively cheap jumbo loans is that many banks keep them in their portfolios rather than selling them to investors, Graham said.

“Lenders can be expected to hold themselves to higher standards as they prepare loans that they expect to keep, as opposed to loans that are later resold to outside investors,” he said.

“First, the borrower will likely rise to a higher set of credit standards, and, second, the bank – in competing for that higher-caliber borrower's business – can be expected to compete with price, offering lower and more competitive interest rates to this favored client. This has led to the convergence of conforming and jumbo interest rates, where the conforming rates had historically been lower than the jumbo ones.”

In other words, lenders have become willing to sacrifice a little profit for the safety that comes with customers with big down payments – usually at least 20 percent – deep pockets and stratospheric credit scores, he said. Add that to the chance to garner more of those clients' business.

Banks are paying their depositors 0.25 percent interest, said Chris Hutchens, vice president of Guaranteed Rate Inc. in Wilmington, so it's not much harm to charge a little less to its mortgage customers.

<p>Jumbo mortgages – a relatively obscure financial product to most potential homebuyers – have moved into the spotlight of late.</p><p>For one thing, people in the market for $1 million homes have jumped into the market in greater numbers, and one of the reasons is that money for them is cheap.</p><p>The trade publication Inside Mortgage Finance reports that though mortgage originations have been falling, jumbo mortgage originations rose 9.3 percent in the second quarter from the first quarter of 2013.</p><p>Interest rates on the mortgages – those totaling at least $417,000 in most areas of the U.S. and $625,000 in the most expensive markets – earlier this month uncharacteristically moved lower than those for the vast majority of Americans, who take out what are called conforming loans.</p><p>The situation was pretty much the same last week as jumbo mortgages averaged 4.84 percent, versus 4.80 percent for conforming loans, according to the Mortgage Bankers Association. Jumbo loan rates historically have averaged at least 0.25 to 0.50 percent higher than conforming loans.</p><h3>Cheap money</h3>
<p>Why did it become as cheap for the affluent to borrow hundreds of thousands or even millions of dollars as for most prospective homeowners who are seeking a mere $100,000 or $200,000?</p><p>It would seem it should be more expensive because, unlike conforming loans, Fannie Mae does not buy jumbo mortgages from lenders and therefore they are not guaranteed by the federal government. </p><p>But bond investors have been willing to forgo a government guarantee on the mortgages in return for the safety of money lent to more creditworthy, high-net-worth borrowers. That has driven the prices of the bonds backed by jumbo loans higher and their interest rates lower, said Ed Graham, professor of finance and real estate at the Cameron School of Business at the University of North Carolina Wilmington.</p><p>The drop comes amid the sharp increase in interest rates on conforming loans in the wake of the Federal Reserve's indication that it might begin to taper off on its purchase of bonds. That policy, so-called quantitative easing, until recently held mortgage interest rates at historic lows.</p><h3>Portfolio loans</h3>
<p>Another reason for relatively cheap jumbo loans is that many banks keep them in their portfolios rather than selling them to investors, Graham said. </p><p>“Lenders can be expected to hold themselves to higher standards as they prepare loans that they expect to keep, as opposed to loans that are later resold to outside investors,” he said. </p><p>“First, the borrower will likely rise to a higher set of credit standards, and, second, the bank – in competing for that higher-caliber borrower's business – can be expected to compete with price, offering lower and more competitive interest rates to this favored client. This has led to the convergence of conforming and jumbo interest rates, where the conforming rates had historically been lower than the jumbo ones.”</p><p>In other words, lenders have become willing to sacrifice a little profit for the safety that comes with customers with big down payments – usually at least 20 percent – deep pockets and stratospheric credit scores, he said. Add that to the chance to garner more of those clients' business.</p><p>Banks are paying their depositors 0.25 percent interest, said Chris Hutchens, vice president of Guaranteed Rate Inc. in Wilmington, so it's not much harm to charge a little less to its mortgage customers.</p><p>“Most banks will take a 4.5 percent spread on anything,” he said.</p><p><b></p><p><a href="http://www.starnewsonline.com/section/topic99"><b>Wayne Faulkner</b></a>: 343-2329</p><p>On <a href="http://www.starnewsonline.com/section/news41"><b>Twitter</b></a>: @bizniznews</b></p>